DAVID BERMAN

Eric Sprott certainly has good timing. News that the investment firm bearing his name, Sprott Asset Management Inc., plans to go public with a $200-million offering comes at a time when Mr. Sprott is in fine form, winning accolades for the returns he has delivered to investors over the years.

Those returns are stunning when compared with the benchmark index or his Canadian peers: His Sprott Canadian Equity Fund has returned an average of 28 per cent a year over the past 10 years, putting it at the top of its class. But the returns are downright eye-popping from an international perspective because of the truly vast number of funds he is up against in the rankings.

According to Morningstar Canada, the Sprott Canadian Equity Fund ranks No. 36 among 105,000 equity funds around the world in terms of its 10-year performance. What makes the ranking even more impressive, if you’re still shrugging your shoulders, is that most of the funds listed above his are specific funds targeting exceptionally hot areas of the market, such as emerging markets (Hello, India).

Mr. Sprott himself has often been criticized for taking a far too narrow approach to investing – he has focused his assets on specific sectors, most recently resources.

However, what makes him stand out among his global peers is that his mandate is not narrow: He chooses to invest in resources because that is where he sees the greatest source of returns. He is not beholden to them.

Global infatuation with emerging markets or resources may come and go, just as an infatuation with technology stocks came and went nearly a decade ago. Mutual fund investors who admire Mr. Sprott, and presumably equity investors who buy his firm’s shares after the initial public offering, see a far more long-lasting quality.

That is, until Mr. Sprott retires or his flagship fund hits a soft patch. Mr. Sprott is 63; over the past three months (to the end of February) his fund is up 12.4 per cent.

NOT DISCOUNTING ALCOA

Alcoa Inc. has made investors nervous about the first-quarter earnings season with its well-scrutinized miss. But analysts are upbeat about the aluminum producer.

Brian MacArthur, an analyst at UBS maintained a “buy” recommendation on the stock, with a 12-month target price of $52 (U.S.). Yes, Alcoa’s first-quarter earnings came in 54-per-cent lower than last year’s results, but Mr. MacArthur believes there is a lot of good news hidden behind the high-profile miss.

He noted that if you ignore restructuring and tax costs, earnings were 44 cents a share, bang-on his expectation. And, if you exclude the company’s packaging and consumer business, which was sold in the first quarter, Alcoa’s after-tax operating income grew by 42 per cent since the fourth quarter. The company also repurchased 14 million shares in the first quarter, which is a bullish sign.

That said, Mr. MacArthur reduced his 2008 share profit estimate to $3.70 from $3.83, partly to reflect higher costs.

John Redstone, an analyst at Desjardins Securities, is also maintaining a brave face on Alcoa, despite the fact that the company’s first-quarter earnings of 37 cents a share were nearly 40-per-cent lower than his own estimate. He maintained a “buy” recommendation on the stock, with a 12-month price target of $44.70.

He, too, prefers to strip out the costs associated with taxes and restructuring. He also added a currency adjustment of 6 cents a share to the results, which puts the first-quarter results within sight (but still below) his estimate.

Although he reduced his 2008 earnings estimate to $3 a share from $3.30, he believes 2009 earnings will still hit $4.47. Give the stock a 10-times earnings multiple and you get to his target price, which is about 20 per cent higher than Alcoa’s current price of $37.18 in New York.

Founder Eric Sprott hopes to raise as much as $200-million with stock sale; venture will test jittery market’s appetite

ANDREW WILLIS AND BOYD ERMAN

Contrarian investor Eric Sprott is swimming against the tide again, planning an initial public offering of Sprott Asset Management Inc. in the midst of the worst IPO market in a decade.

The imminent deal could value the company at up to $1.5-billion, and Mr. Sprott’s stake at $1-billion.

The planned offering will see $200-million of Sprott Asset stock offered to investors in a sales campaign that could start as soon as Thursday, according to investment banking sources. It’s the latest in a series of IPOs meant to pass the torch from one generation of money managers to the next.

The offering will confirm the 63-year-old founder’s status as a self-made billionaire, as Mr. Sprott, an Ottawa native and noted art collector, owns 78 per cent of the company. That share will be reduced to 67 per cent in the IPO.

A decade-long run of winning bets on resource companies, along with contrarian calls against blue-chip stocks such as the banks, means Sprott Asset can go public on the back of a benchmark equity fund that posted a 28-per-cent average annual return over 10 years. The S&P/TSX index averaged a 7.8-per-cent performance over the same period.

“Eric wants to build something for the long term, and the IPO helps pass this business on to the portfolio managers who have recently joined the firm,” said one banker working with Sprott Asset, which takes care of $6-billion for institutional and individual clients.

The planned financing comes amid recession fears, a selloff in financial services stocks and a vicious bear market for IPOs. Financiers say all this negative news will add lustre to Sprott Asset’s strong results.

“There’s a scarcity value to Sprott Asset, as a money manager, and a scarcity value to an IPO in this market,” said another banker working on this financing, noting credit card firm Visa just completed a successful initial offering.

He added: “It’s also a play on the strong commodity cycle,” because Sprott is so closely identified with resource stocks.

Mr. Sprott, a married father of two, formally launched Sprott Asset in 2000 after successfully founding an investment bank now known as Cormark Securities Inc., then starting a hedge fund.

Over the past year, Sprott Asset Management hired a string of proven money managers as part of a diversification strategy. Small-cap specialist Allan Jacobs joined from Sceptre Investment Counsel Ltd. [SZ-T] and award-winning resource stock pickers Charles Oliver and Jamie Horvat moved in from AGF Funds.

An IPO makes it easer to eventually transfer ownership to this group from Mr. Sprott and other veterans such as growth-focused Peter Hodson, who joined from CI Funds, and gold bug John Embry, aged 67. The concept of an IPO has been openly discussed by company executives for months. Mr. Sprott was not available for comment Monday.

Sprott Asset insiders who sell their stock in the IPO are expected to reinvest much of the money in their funds.

Toronto-based Sprott Asset has six funds available to individual investors, including dedicated energy and gold funds, along with its high-flying equity fund.

In Canada, the planned Sprott Asset IPO follows on the 2006 debut from fund manger Gluskin Sheff + Associates Inc. and financings this summer from U.S. hedge fund manager Och-Ziff Capital Management [OZM-N]and larger money managers such as Blackstone Group LP [BX-N] and Fortress Investment Group LLC [FIG-N].

While Gluskin Sheff, with a $700-million market capitalization, has performed well for investors, the three big U.S. money managers that went public last summer are now trading well below the IPO price.

“The challenge for Eric Sprott will be convincing investors they should pay a premium for a share of his performance fees.

“Although they’ve paid that premium in the past, I think the decline in the U.S. funds may make them reluctant to pay a big multiple in the future,” said an executive at a rival, private Canadian money manager.